According to data from the Association of Investment Companies (AIC) and fund website FE, three quarters of investment funds have beaten their open-ended rivals over the past 10 years even though they are run by the same manager.
In the case of three of the best-performing trusts, the gap between them and the equivalent funds was more than 200%.
As Laura Suter, personal finance analyst at investment platform AJ Bell points out, ‘fund managers will often run both a fund and an investment trust, investing in exactly the same or very similar assets, but being canny enough to pick the right one can mean doubling your returns. What’s more, the trust will be cheaper in two-thirds of the cases.’
One of the reasons for this gulf in performance may be the trusts’ ability to take on debt in order to ‘gear up’ their returns.
‘This works as an accelerator on performance, meaning that when the trust is rising it sees larger returns than a vehicle that doesn’t use gearing,’ says Suter.
‘The flip-side is that trusts generally deliver more volatile performance, meaning that they are more prone to sharper rises and falls in values - in 90% of cases the trust delivered more volatile performance than the fund.’
Another reason for the outperformance of trusts may be the fact that the discount to net asset value (NAV) can be managed and in some cases eliminated altogether. Funds on the other hand can’t trade at a discount or a premium to their NAV.
A third reason may be that trusts tend to have longer holding periods and therefore lower turnover costs as fund managers are less likely to tinker with them. For example, Neil Hermon’s Henderson Smaller Companies Trust (HSL) has an average holding period of five years and turnover costs of 8 basis points or 0.08% of assets per year.
Hermon's UK Smaller Companies Fund - which owns the same stocks as the trust - doesn't publish its average holding period, but annual dealing costs of 11 basis points or 0.11% of assets suggest that the turnover ratio is higher meaning the holding period is shorter.
